Justice News

Three Investment Professionals Arrested And Charged In Manhattan Federal Court In Connection With Sophisticated Scheme To Defraud Investors

Two Additional Participants in the Scheme Have Pled Guilty to Their Roles and Are Cooperating with the Government

Preet Bharara, the United States Attorney for the Southern District of New York, Diego Rodriguez, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced the arrests of CHRISTOPHER CERVINO, a/k/a “Smitty,” LARRY WERBEL, and SHEIK F. KHAN, a/k/a “Abida Khan,” for their involvement in a scheme, between 2009 and March 2015, to defraud at least 100 investors of more than $15 million. CERVINO, WERBEL and KHAN, along with EDWARD DURANTE, a/k/a “Ted Wise,” a/k/a “Efran Eisenberg,” a/k/a “Yulia Svitchkara,” a/k/a “Anthony Walsh,” a/k/a “Ed Simmons,” who arrived by extradition from Germany on December 18, 2015, were charged in a Superseding Indictment unsealed today with various crimes related to a fraudulent scheme principally involving a publicly traded company called VGTel, Inc. (“VGTL”), which was secretly controlled by DURANTE. DURANTE, who was previously convicted in December 2001 of securities fraud, wire fraud, and money laundering in this District and barred by the U.S. Securities and Exchange Commission (“SEC”) from any association with the sale of securities, in concert with CERVINO, WERBEL, and KHAN, executed the scheme through false and misleading representations about how private investor monies would be used, as well as omissions in connection with the sale of VGTL securities, and through the manipulation of the public market in VGTL’s stock.

In addition, Mr. Bharara announced the unsealing of guilty pleas earlier this week by WALTER REISSMAN and KENNETH WISE, who admitted to their own involvement in the fraudulent scheme. REISSMAN pled guilty to conspiracy, securities fraud, wire fraud, and making false statements to law enforcement officials. WISE pled guilty to conspiracy, securities fraud, wire fraud, and money laundering. REISSMAN and WISE are cooperating with the Government in this investigation.

CERVINO, who is charged with conspiracy, securities fraud, wire fraud, and perjury, was arrested this morning in Franklin Lakes, New Jersey, and was presented this afternoon in federal court in Manhattan before United States Magistrate Judge Andrew J. Peck. WERBEL, who is charged with conspiracy, securities fraud, wire fraud, investment adviser fraud, and making false statements, was arrested this morning in Solon, Ohio, and was presented today in federal court in the Northern District of Ohio. KHAN, who is charged with conspiracy, securities fraud, wire fraud, and investment adviser fraud, was arrested last night in Las Vegas, Nevada, and will be presented later today in federal court in the District of Nevada. The case is before United States District Judge Andrew L. Carter, Jr.

In a separate action, the SEC filed civil charges against CERVINO, WERBEL, KHAN, REISSMAN, and WISE. The SEC previously charged DURANTE on December 18, 2015.

U.S. Attorney Preet Bharara said: “No sooner had Edward Durante gotten out of jail for securities fraud than he allegedly headed up another criminal scheme. As alleged, Durante and his network of scammers spun a web of lies, inducing victims into investing in phony private placement opportunities, manipulating the price and trading volume of a publicly traded stock, and conspiring to defraud more than one hundred investors out of over $15 million.”

FBI Assistant Director Diego Rodriguez said: “Over six years, Cervino, Werbel, and Khan allegedly conspired with recidivist securities fraud defendant Edward Durante to defraud more than 100 investors out of millions in a scheme of misleading representations and stock manipulation. The FBI is committed to investigating and bringing to justice those who prey upon trusting individuals for their own personal gain.”

USPIS Inspector-in-Charge Philip R. Bartlett said: “These individuals took advantage of their manipulation of the market to con investors into purchasing stock at inflated prices. Postal Inspectors remind investors to thoroughly review all investment opportunities, especially whenever great returns are offered, to avoid becoming a victim of a scam.”

According to the allegations in the Superseding Indictment unsealed today in Manhattan federal court,[1] and statements made in court proceedings:

From in or about 2009 up through and including in or about March 2015, DURANTE, CERVINO, WERBEL, KHAN, REISSMAN, and WISE (the “Defendants”) perpetrated a multi-pronged scheme to defraud more than 100 investors of at least $15 million by soliciting funds in public and private shares of various securities, including VGTL, through false and misleading representations and omissions and by failing to invest investors’ funds as promised. The Defendants further manipulated the public Over-The-Counter market of VGTL stock by controlling a majority of the public shares, inducing investors to buy stock based on false representations and omissions, and engaging in trades in which the Defendants controlled both the accounts that purchased the stock and the accounts that sold the stock in order to artificially inflate the stock price and trading volume. Moreover, DURANTE, with the knowledge of WERBEL, REISSMAN and WISE, among others, used numerous aliases in order to conceal his true identity and regulatory bar from investors, compliance personnel, regulators and law enforcement. Of the approximately $15 million invested in the fraudulent scheme, more than $9 million was funneled to the Defendants and other co-conspirators.

2001 Securities Fraud Conviction

In December 2001, DURANTE was convicted in federal court of conspiracy to commit securities fraud, wire fraud, and money laundering, as well as making false statements in connection with a market manipulation scheme in which the defendant also used the alias “Ed Simmons.” The defendant was sentenced to 121 months in prison and was released in or about 2009, the year he began the current scheme. In connection with that scheme, DURANTE was ordered by a United States District Court to pay disgorgement and prejudgment interest totaling over $39 million. DURANTE was also barred from certain activities in connection with the securities industry, including the sale of securities.

Private Placement Securities Fraud Involving VGTL

Among other fraudulent and illicit conduct, between 2009 and in or about March 2015, DURANTE, CERVINO, WERBEL, KHAN, REISSMAN, and WISE and others fraudulently induced victims to invest in private shares of VGTL by, among other things, concealing from investors that DURANTE controlled the entities selling the shares; that DURANTE was prohibited from any association with the sale of securities; and that DURANTE was previously convicted of crimes related to a similar scheme to defraud. Furthermore, some of the Defendants lied to investors by (a) representing that their investments would be used to fund the operations and growth of VGTL in connection with potential reverse mergers, when in reality no reverse merger was ever consummated and the investments were instead used primarily to personally benefit the Defendants; and (b) representing that the investors would receive an eight-percent dividend on their investments until their private shares could be sold at a promised premium on the public market, when, in reality, no interest payments were ever provided to the investors and many investors never received VGTL stock certificates or were not permitted to sell the stock.

In order to fund his illegal scheme, DURANTE used a network of brokers, including WERBEL and KHAN, investment advisers in Cleveland, Ohio, and Los Angeles, California, respectively, to induce investors to buy shares of VGTL. Although WERBEL knew DURANTE’s true identity and that he had been previously convicted of securities fraud, WERBEL did not disclose this information to any of his clients he solicited to invest in VGTL. Moreover, DURANTE provided WERBEL with kickbacks of as much as 20 percent of monies invested by his clients, which WERBEL did not disclose to his clients. WERBEL also failed to disclose to his clients that the investors were purchasing shares of VGTL from entities controlled by DURANTE, not from the issuer itself. Similarly, KHAN also received kickbacks in return for inducing her clients to invest in private shares of VGTL, which she did not disclose to her clients. KHAN also did not disclose to her investors that their private shares of VGTL were purchased from DURANTE-controlled entities. In total, WERBEL received more than $300,000 and KHAN received more than $100,000 in undisclosed kickbacks from DURANTE for inducing clients to invest in private shares of VGTL.

Manipulation of the Market for Shares of VGTL

The Defendants further engaged in a scheme to control and manipulate the public stock of VGTL in order to artificially inflate the stock price and trading volume so as to profit from their own sales of VGTL stock and to further induce investments in private shares of VGTL. To that end, through entities he controlled, DURANTE held a majority of the publicly-traded stock of VGTL. DURANTE recruited CERVINO, a broker, to open brokerage accounts associated with DURANTE-controlled entities and investors who were clients of WERBEL’s and KHAN’s, many of whom did not know they had accounts with CERVINO. WERBEL and KHAN, along with DURANTE, induced their clients to purchase VGTL stock through CERVINO – sometimes without the clients’ knowledge or permission – while DURANTE and CERVINO ensured that many of these purchases were matched with sales of VGTL stock by DURANTE-controlled accounts. The result of these transactions was that the Defendants were effectively taking both sides of a single transaction in VGTL stock in order to artificially control VGTL’s stock price. The Defendants’ efforts to artificially inflate the market for VGTL increased the stock price from approximately $.25 per share in April 2012 to as much as $1.90, and dramatically inflated the trading volume, which increased the Defendants’ abilities to raise private investments in VGTL. To compensate CERVINO for his efforts to control and manipulate the market in VGTL, DURANTE made at least two cash payments to CERVINO totaling $35,000. Moreover, DURANTE personally siphoned more than $4 million in profits, which he concealed through the use of wire transfers among multiple accounts in the names of other individuals, including WISE.

* * *

DURANTE, 63, is charged with one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, one count of conspiracy to commit money laundering, one count of money laundering and one count of perjury. Counts One and Seven each carry a maximum sentence of five years in prison. Counts Two through Six each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

CERVINO, 43, is charged with one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, and one count of perjury. Counts One and Five each carry a maximum sentence of five years in prison. Counts Two through Four each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

WERBEL, 67, is charged with one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, one count of investment adviser fraud, and one count of making false statements to federal officers. Counts One and Six each carry a maximum sentence of five years in prison. Counts Two through Five each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

KHAN, 52, is charged with one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, and one count of investment adviser fraud. Count One carries a maximum sentence of five years in prison. Counts Two through Five each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

On January 4, 2016, WISE, 75, pled guilty before Judge Peck to one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, one count of conspiracy to commit money laundering, and one count of money laundering. Count One carries a maximum sentence of five years in prison. Counts Two through Six each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

On January 5, 2016, REISSMAN, 58, pled guilty before Judge Carter to one count of conspiracy to commit securities fraud, one count of securities fraud, one count of conspiracy to commit wire fraud, one count of wire fraud, and one count of making false statements to federal officers. Counts One and Five each carry a maximum sentence of five years in prison. Counts Two through Four each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencings of the defendants will be determined by the judge.

Mr. Bharara praised the work of the FBI and the Postal Inspection Service, and thanked the Securities and Exchange Commission for its assistance.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Edward Y. Kim, Daniel S. Goldman, and Andrea M. Griswold are in charge of the prosecution.

The allegations contained in the Superseding Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

[1] As the introductory phrase signifies, the entirety of the text of the Superseding Indictment and the description of the Superseding Indictment set forth herein constitute only allegations, and every fact described should be treated as an allegation.